Cost segregation is a powerful tax strategy used by commercial and residential rental property owners to help free up cash flow and mitigate tax liability. It involves a detailed study of your building assets to identify which parts of your property qualify for accelerated depreciation expense. By this point you are probably thinking to yourself that your accountant has this covered, and they might…but they also might not.
Cost Segregation is not a routine part of your annual taxes, and it is never required to be done. It is an elective add-on that many CPAs perform and many do not. Confused yet? The first thing you need to do if you own real property is ask your accountant if they can help you do a cost segregation study or if they can help connect you with someone who does. Not all CPAs are comfortable performing this work, as it requires specialized knowledge that is often outside the CPAs skillset. They likely have a trusted third-party partner that does possess such expertise.
Having this discussion early is beneficial to both you and your CPA. You both might have assumed that the other would bring it up if it were important – ultimately letting this opportunity slip through the cracks.
The bottom line is, if you own real property for business (commercial or residential rental) and have not had a cost segregation study performed (or don’t know if you have), reach out to your CPA and start the conversation.
How Does Cost Segregation Work?
So, what exactly is cost segregation? It’s a study performed on your property that reclassifies both building components and land improvements into their shortest allowable class lives. Cost Segregation front-loads depreciation, giving you extra cash early on when you need it the most.
Studies should be performed by experienced and reputable professionals who understand the engineering-based approach required to break out building assets. Interview providers and ask questions. It is important that you understand the work being done, and trust the provider who is handling your job.
A cost segregation study often begins with a site inspection where a specialist walks your property taking detailed notes and pictures of the land and building. With this information, the professional can reclassify your assets and calculate your savings based on depreciation, bonus, and other technical strategies.
Your provider will present all findings and final calculations to you in the form of a report, the results of which will be incorporated into your annual taxes by your CPA. Another important point is to verify that your cost segregation provider offers complete audit protection. If you find yourself the subject of an audit, you want to be sure that the people who performed your study can back up their work and advocate on your behalf.
How Does it Benefit Me
For such a complex strategy the benefit is simple – do you prefer the government return your depreciation money slowly over time? Or, would you rather collect as much money as possible early on so that you can earn your own interest or reinvest it how you want?
While the biggest and most obvious benefit of a cost segregation study is cash flow, it also provides the property owner with enough detailed information to help determine treatment of future improvements.
Why Doesn’t My CPA do it For Me?
A CPA is a broad term for someone certified to do many types of accounting, including taxes. While a CPA can certainly choose to study niche aspects of the tax code, like cost segregation, they don’t have to. Conversely, someone does not necessarily need to be a CPA to perform cost segregation studies.
How We Can Help
Veritax Advisors offers a unique advantage. Our founder is a licensed CPA who has a targeted focus in cost segregation. This does not mean we want to do your taxes. We are not looking to take the job of your CPA. It means we speak their language and want to work with them! We understand the nuances of cost segregation and we come at it from a practical approach.
We have extensive experience working with all types of property owners and we guarantee our results. Our goal is to work directly with you and your CPA to create a powerful team and ensure you are taking advantage of all possible tax savings.
For more information or to chat about your property, reach out to our founder and licensed CPA, Chris Ostler.